The U.S. dollar clawed higher against the euro and Asian stocks slipped on Tuesday, as investors braced for the outcome of a Federal Reserve meeting that could disappoint some looking for big policy changes.

Speculation has been growing that the Fed will signal a need for more stimulus to support growth after a steady stream of soft economic figures, pushing down U.S. bond yields and helping to lift global equities to the highest in three months.

However, acknowledgment of economic deceleration may disappoint some investors who had been betting the Fed would make a bigger move, such as buying bonds to pull down market rates.

Over the past one week or so, there has been increasing chatter that the tone of today's Fed meeting could potentially deviate from the seemingly unexciting post-meeting announcements lately, said Thomas Lam, group chief economist with DMG & Partners Securities in Singapore.

Still, the rhetoric from policymakers has not been completely uniform of late, he said in a note.

With a Bank of Japan policy meeting and Chinese trade data also due on Tuesday, caution was the key word for investors.

The dollar rose 0.2 percent against a trade-weighted basket of major currencies <.DXY>, bumping up against a trendline stretching down since June.

The yen was also a broad gainer, rising around 0.5 percent to 113.03 per euro after a senior government official warned that sudden strength has not been good for growth.

However, the Bank of Japan is not expected to make any changes to monetary policy until there are clearer signs of the negative impact of the yen.

There will be a greater chance of a stronger yen if the U.S. implements steps that would likely lead to lower rates and if the BOJ keeps the status quo, said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.

STOCKS REFLECT CAUTION AHEAD OF FED

On a rare day when both the yen and Japanese stocks rose, the Nikkei share average was up 0.6 percent <.N225> as investors bought back counters they had sold on Monday.

The MSCI index of Asia Pacific stocks outside Japan fell 0.4 percent <.MIAPJ0000PUS> after hitting a three-month high on Monday.

Consumer discretionary stocks, a popular bet on long-term growth in consumption in Asia, were the hardest hit, with profit taking the main driver.

The sector is still the top performer in Asia ex-Japan so far this year, up 7.8 percent since January. The telecommunications sector is the second-best performer, up 6.5 percent.

Energy is in last place, down 5.9 percent.

Developed government bond markets were mixed, with 10-year bond futures in Japan and Australia down slightly and U.S. futures up a tad.

The spread of the 10-year U.S. Treasury yield over the 2-year note in the cash market was at its narrowest since May 2009, with investors clinging to the higher yields of later maturity bonds.

Bond market participants are split on what the Fed will do. Fifty-two percent of money managers do not expect the Fed to flag additional policy easing, while 48 percent predict it will, a Reid Thunberg ICAP survey showed.

If the Fed does not strike a strong enough tone supporting growth, thereby getting closer to buying bonds from the market, the spread could widen again.

The strength in the dollar weighed on U.S. crude prices. Oil for September delivery reversed earlier gains and slipped 0.3 percent to $81.23 a barrel ahead of data due later expected to show a decline in U.S. crude inventories.

Gold was largely unchanged on the day, trading at $1,200 an ounce, ahead of the Fed.

The precious metal is still heading for its 10th straight year of gains.

(Additional reporting by Aiko Hayashi in TOKYO; Editing by Neil Fullick)

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